In the intellectual property field, a common recurring theme is that of trademark infringement; the most common form—which this blog has already twice covered—involves the production or endorsement of a product or service to which the plaintiff asserts he has rights. On April 1, a far more rare and intriguing form of trademark action was adjudicated in the Court of Appeals for the Second Circuit in Tiffany, Inc. v. eBay, Inc..

As explained in the opinion, Tiffany & Co. is a well-established retail manufacturer of high-priced jewelry. It has been mindful throughout its history of keeping high-end recognition of its brand in the mind of consumers and has accomplished that goal primarily by avoiding the sale of its products in any retail stores, other than Tiffany itself or its online and catalog counterparts. eBay is a website that enables millions of people to buy or sell (often used) goods. eBay does not have much to do with the actual transaction process—the company merely hosts the site, performs administrative functions, aids in different processes along the way, and takes a percentage of the item’s sale price as a fee.

One of eBay’s most difficult problems has been that of counterfeit or fraudulent merchandise listed for sale on its website, a practice that was at issue in Tiffany. In 2004 and 2005, Tiffany conducted “Buying Programs,”—surveys in which Tiffany purchased products described as “authentic Tiffany jewelry” through eBay—and found that between 70% and 80% of the merchandise purchased turned out to be fake. eBay took steps to protect against counterfeit sales: it implemented procedures by which it would forewarn sellers of the penalties for selling fake merchandise; it would offer a link to a Tiffany-maintained eBay page that warns of the likelihood of non-authenticity; and would cancel transactions and listings that were flagged by either eBay itself or via a Tiffany-submitted Notice Of Claimed Infringement form. These implementations failed, in Tiffany’s view, to adequately address the issue, and Tiffany subsequently filed its complaint in the Southern District of New York in July of 2004.

Tiffany made two primary allegations: (1) eBay, by purchasing advertisements from web engines for “Tiffany” queries, should be deemed a primary actor for the counterfeit transactions that occur on its site—a tenuous argument rejected by both the district court and the court of appeals outright—and (2) by being aware of the likelihood and frequency of the sale of non-authentic merchandise on its site, eBay’s actions—or lack thereof—should be deemed “contributory trademark infringement,” and it should therefore be held jointly and severally liable for the fraudulent activities of the sellers hosted on its site. The district court, here, rejected all of Tiffany’s claims.

The precedent for bringing a “contributory trademark” action is found in a 1982 decision by the Supreme Court, Inwood Labs. v. Ives Labs. In holding that such an action can be sustained in a case involving a drug company enticing pharmacists to mislabel certain products with trademarked names, the Court held that “if a . . . distributor intentionally induces another to infringe a trademark, or if it continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement, the . . . distributor is contributorily responsible. . . .” (emphasis added). (While it remained unclear from the opinion whether this theory could be extrapolated to services as well, decisions in the Seventh and Ninth circuits, as well as the district court in Tiffany, did hold as such, and the appellee did not raise that issue on appeal.)

In the lower court’s judgment, although “eBay clearly possessed general knowledge as to counterfeiting on its website, such generalized knowledge is insufficient under the Inwood test to impose upon eBay an affirmative duty to remedy the problem.” Essentially, the district court held that although there may have been reason to know that there was fraudulent activity occurring, this was “generalized knowledge,” and not with respect to any specific item listed. (In fact, any time eBay was informed of fraudulent activity, it took all possible steps to remedy the situation.) The Second Circuit affirmed this analysis in its entirety.

A critical look at this case reveals what could, at first blush, be viewed as a baffling interpretation of Supreme Court precedent. The Second Circuit agreed that the second prong of Inwood—specifically the “has reason to know” part—seems to fit quite snuggly into the facts of this case. A 75% likelihood of non-authenticity seems like a great argument for “reason to know.” In agreeing with the district court, however, the court held that Inwood, although articulating this flexible two-pronged approach, actually only applied the “knows” aspect of the test, and arguably did not intend on creating the wide latitudinal approach necessary for Tiffany to be victorious. Interpreting a subsequent case by the Supreme Court, the Second Circuit said that the “reason to know” must be accompanied by some specificity, and as such, concluded that “some contemporary knowledge of which particular listings are infringing . . . is necessary.”

Although it would have been intriguing to see how eBay would have responded should they have lost in this case, and a reversal would arguably have been justifiable given the verbiage of the Inwood test, I think all would agree (other than Tiffany, of course) that the most favorable result was reached. eBay, alone, hosts over 6 million listings per day; as the Tiffany court stated, “at any given time it contains some 100 million listings”—not to mention the billions of sales occurring on other marketplace sites, such as Amazon.com, that would have been affected by a contrary decision. If eBay were told that it had to verify the authenticity of each and every item on its website, it would have to entirely reinvent its business enterprise, resulting in a tremendous detriment to the millions, every day, who use the site the way in which it was intended. eBay bestows great societal and economic benefits on people who wish to buy or sell used products; getting great deals on merchandise is far easier with eBay around, and we will continue to have eBay, thanks to the Second Circuit.